Wal-Mart’s Truth in Advertising

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to a recent in-depth analysis conducted by consumer researcher Cheapism.com, Wal-Mart’s (NYSE: WMT) claim that filling a cart with identical items in its stores will yield a lower price tag than for the same cart in other stores is accurate.

The study specifically compared prices at Wal-Mart, Target (NYSE: TGT) and Kmart, which is a division of Sears Holdings (NASDAQ: SHLD). Heading into the holiday season, discounters are scrambling to differentiate themselves and attract more traffic. The ability to claim price dominance is a big win for Wal-Mart and is just one of the reasons that the stock is a buy at current levels.

The Research

When cheapism.com compared shopping carts with an assortment of 30 goods, ranging from electronics to basic household necessities, Wal-Mart took the title of lowest-priced: the Wal-Mart total was $1,776.15, the Target total was $1,866.10 and the Kmart total was $2,092.82. Interestingly, the price differential between Wal-Mart and Target is almost exactly what consumers can save at Target by using the store’s REDcard, which gives shoppers an additional 5% discount. That means that shoppers who prefer Target, which scored higher in the shopping experience and store brand categories, can neutralize the price differential by using the REDcard. Wal-Mart also beat Target on overall availability and depth of products.

Also affecting the pricing battle is the decision of both Wal-Mart and Target to institute price-matching policies for this holiday season. While the move is mainly intended to minimize the “showcasing” effect – the practice by consumers of shopping physical stores as showcases and then ordering those items at lower prices online – they will certainly have some impact as the two discounters do battle. Unfortunately for Kmart, the study revealed that it was not a competitive factor in any of the areas deemed important by either study participants or researchers.

The Tryptophan Trot

In a move that could be best characterized as consumerism run amuck were it not for the fact that U.S. consumerism surrounding the holiday season ran amuck long ago, Wal-Mart recently announced its plan to open even earlier on Black Friday. The store will open so early for the busiest retail day of the year in the U.S. that it will still be the evening of Thanksgiving when the doors open and deals are unveiled – 8 p.m. to be precise. According to the National Retail Federation, retail spending is expected to grow by only 4.1% as compared to 5.6% a year ago.

So, still fresh from the tryptophan coma brought on by Thanksgiving dinner – tryptophan is the enzyme in turkey that makes you sleepy – you will have the option to leave family gatherings and set out in search of must-have deals. While I believe the move will attract business, and thus be favorable for shareholders, it is with a certain sadness that this reality is acknowledged. I would love to see Target decide to buck this trend and open on Friday morning after saying, “Be with your family on Thanksgiving, we’ll be here to offer you great deals after you get a full night’s sleep.” Target has yet to announce its Black Friday plans.

The Trades

Before getting into the relative strengths of Target versus Wal-Mart, the research above suggests that Kmart is continuing to lose ground in a highly competitive industry. While Sears Holdings has made a valiant effort to revive such iconic American brands as Kmart and Sears, I would be a seller for the foreseeable future. There is too much competition at the top to risk capital on a lagging number three (I exclude Costco based on its requirement of a membership, but certainly prefer Costco to Kmart from an investment perspective).

By the numbers, Target has a slight edge of Wal-Mart. Target trades at a P/E of 14.2 compared to 15.3 for Wal-Mart, a PEG of 1.16 relative to 1.59 for Wal-Mart, offers a dividend yield of 2.3% relative to 2.2% for Wal-Mart and has an operating margin of 7% compared to 6% for Wal-Mart.

I think both stocks are solidly positioned at current levels, but, if I had to choose one, I would pick Wal-Mart on the real and perceived price differential. With the U.S. economy still struggling, consumers are being ever more careful with their disposable income. While 5% may seem trivial, I believe the sheer belief that Wal-Mart is cheaper will give it a slight edge. Target should have a great holidays, but if you want a single holding for your core portfolio, at current levels, Wal-Mart is the most appealing.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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